Can a Whistleblower with Unclean Hands Get a Reward?

If you have participated in the conduct that you wish to report to the U.S. Government, or otherwise have unclean hands, your decision to become a whistleblower can expose you personally to criminal or civil liability.  Whether you are were central to implementation or simply a low level participant, you will need to consult with an attorney about the potential implications of your involvement and carefully approach the government to determine whether they are interested in prosecuting a person in your role.

The U.S. will face a policy dilemma when you approach them. On one hand, it wants to prosecute the wrongdoers who have broken the law and drained resources from the treasury. It doesn’t want to encourage an individual to break the law knowing that the U.S. will later pay them for reporting it. On the other hand, the U.S. needs to encourage individuals with evidence of fraud to come forward. In many cases, a morally conflicted wrongdoer has the best evidence of the misconduct. If the U.S. prosecutes them, it would have a chilling effect on other potential whistleblowers.

In most cases, a criminal conviction bars recovery of a whistleblower reward while a role in “planning and initiating” reduces the percentage of recovery that will be awarded.

The IRS is the only one of the major programs that will pay a reward to an individual that is criminally convicted for conduct relating to the information that they reported. However, it will not pay an award to a person who is convicted of criminal conduct “arising from his or her role in planning and initiating the action.” I.R.M. §

In 2012, the IRS paid $104 million for the information that Bradley Birkenfeld provided about tax evasion at UBS, even though he pled guilty to conspiracy to defraud the U.S. in 2008. Birkenfeld was prosecuted by the Department of Justice for his role in tax evasion because he was not forthcoming about information about his largest client when he approached the U.S. Government for a deal. After he served 2.5 years in prison, he was paroled and received the award from the IRS.

The Internal Revenue Manual § spells out the factors to be considered when reducing an award for planning and initiating tax noncompliance where there is not a criminal conviction. These include:

  • Was the individual the sole decision maker, one of several planners or an advisor?
  • At the planning and initiating stage, were they engaged in reasonable tax planning or objectively unreasonable misconduct where steps were taken to hide it?
  • Did they know or should have known that tax noncompliance was a likely result?
  • Did they attempt to cover up the true nature of the transaction?
  • Did he or she solicit others to participate?

If an individual is not prosecuted but has engaged in culpable conduct, this fact is taken into account during the award determination. See 17 C.F.R. § 240.21F-6(b)(1). The Commission can consider, among other things, the individual’s role, whether they financially benefitted, whether they were in a position of authority, and whether their conduct was intentional with knowledge that it broke the law.

In its guidance to the final rules on the law, the SEC recognized the value of culpable whistleblowers. “[C]ulpable whistleblowers can enhance the Commission’s ability to detect violations of the federal securities laws, increase the effectiveness and efficiency of the Commission’s investigations and provide important evidence for the Commission’s enforcement actions.” It noted that Section 21F of the Exchange Act did not require “a per se exclusion for culpable whistleblowers.”

The SEC does not count the monetary sanctions of the whistleblower or “any entity whose liability is based substantially on conduct that the whistleblower directed, planned or initiated” toward the $1,000,000 threshold for earning a reward or the total amount collected for the purpose of paying the whistleblower. 17 C.F.R. 240.21F-16

The idea that the False Claims Act would pay those who have engaged in culpable conduct dates back to the origin of the law in 1863, when Senator Jacob Howard said that they were using “a rogue to catch a rogue.” However, in 1988, section 3730(d)(3) was added by the Major Fraud Act to cover relators with unclean hands.

If the relator is convicted of criminal conduct related to the false claim, they are dismissed from the lawsuit and receive no share of the proceeds. 17 U.S.C. 3730(d)(3); U.S. ex rel. Schroeder v. CH2M Hill, case no. 09-cv-5038, 2013 WL 1982330 (E.D. Wash. 2013)(dismissal of relator who pled guilty to related crime). If the relator “planned and initiated the violation” but is not convicted of a crime, then the court may take it into consideration when determining the share of the award. $3730(d)(3); U.S. ex rel. Green v. Service Contract Education and Training Trust Fund, 843 F.Supp.2d 20, 28 n.6 (D.D.C. 2012) (perpetrator of the alleged fraud with unrelated criminal conviction not barred from qui tam lawsuit).

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